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On Bank Consolidation in a Currency Union by Fabio Di Vittorio download in ePub, pdf, iPad

By contrast, the response of output to the tax-based consolidation is broadly similar across the two regimes. No noticeable progress occurs in reducing debt until about four years into the consolidation. Nominal variables are rendered stationary by suitable transformations. For the North, we assume an unaggressive tax rule, which is achieved by setting and. Finally, we assume that the structure of the foreign country the North is isomorphic to that of the home country the South.

At somewhat longer horizons, the comparative advantage of spending cuts - in terms of producing a relatively lower fiscal sacrifice ratio - is even more pronounced. Despite putting modest downward pressure on interest rates, the tax-based consolidation causes the real exchange rate to appreciate, reflecting the fall in the relative supply of the South's goods. Because the drag on aggregate demand tends to be smaller for a given-sized tax-based consolidation reflecting that e.

Real interest rates also rise in the North, compressing domestic demand and hence the South's exports. In equilibrium, shocks that affect entrepreneurial net worth - i.

The output contraction

The output contraction is smaller under tax-based consolidation in the near-term, but is a considerably deeper at longer horizons. Finally, the persistence coefficient for the consumption demand shock see eq. Our model assumes that the government issues only one period nominal bonds. By assuming that gross inflation i.

Finally the persistence coefficient for the